Have You Never Filed a Tax Return?
Each year around tax season, some US Taxpayers come to the (unfortunate) realization that they should have been filing tax returns in one or more prior years. Unfortunately, researching the information on Google can feel like little more than diving into one rabbit hole after the next. Depending on how many years of US and foreign noncompliance the taxpayer has (along with whether or not they have foreign income, assets, investments, and income) will impact the extent of the complexity involved in preparing their prior-year tax returns. In recent years, the Internal Revenue Service has made international compliance a key enforcement priority, and therefore when tax returns have an international non-compliance component to them, reporting and tax compliance is even more complicated — but manageable, so try not to overwhelm yourself too much with online fear-mongering. Let’s go through some of the basic considerations when it comes to unfiled tax return filing in prior years.
Are You a U.S. or Foreign Resident?
When a person is considered a US person (such as a US citizen or Lawful Permanent Resident), they are required to file an annual US tax return if they meet the threshold requirements for filing unless, for example, they qualify under certain treaty elections to be treated as a non-resident and then the requirements are different. But, an important fact to keep in mind is that simply because a person resides outside of the United States does not mean they are exempt from filing a tax return if they are otherwise a US person — since the United States taxes individuals on their worldwide income without regard for their country of residence.
What Type of Unreported Income?
When a person has unreported income, it is important to assess just how much income the person has and whether or not they pay taxes in a foreign country — or otherwise qualify for an exception such as the Foreign Earned Income Exclusion. Even though a person may have significant amounts of unreported income, if they have already paid tax in a foreign country and/or qualify for the Foreign Earned Income Exclusion (or Foreign Housing Exclusion), the net-effective income tax due and owing will likely be small — or even completely eliminated depending on whether or not they paid taxes in a high-tax jurisdiction.
Foreign Tax Credits May Apply
When a person is required to pay foreign taxes on the same income that they will report on their US tax return, they may qualify for a Foreign Tax Credit to offset the US income. In other words, if a taxpayer already paid income tax on the foreign income to a foreign jurisdiction’s tax authority, they may qualify to apply for a foreign tax credit in order to reduce or eliminate US tax on the income generated overseas.
In addition to unfiled tax returns, many US persons may also have foreign accounts, assets, and investments that were required to be disclosed on one or more international information reporting forms such as the FBAR or Form 8938. Unfortunately, the failure to submit these forms may result in significant fines and penalties — although these penalties can oftentimes be reduced or eliminated through one of the offshore amnesty programs.
Thus, it is important for taxpayers to carefully assess their situation before filing any returns in prior years to determine exactly what needs to be filed — and whether they qualify for any of the international tax amnesty programs.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance.
Contact our firm for assistance.